The Economics of Maintenance for Real Estate Investments
We propose a theory of urban decay. Following a negative real estate demand shock, property managers optimally suspend maintenance and the probability that they ever restart can be modest. Because maintenance expenditures are proportionately less risky than are the incremental building profits they generate, managers impose a more demanding profit standard on maintenance than on the initial investment. This differential in profit standards means that rather than maintain existing investments, property managers favor new investments, which, if marginally acceptable, they also leave unmaintained. Contractually required maintenance (e.g., for publicly subsidized real estate investments), increases the minimum profit for the initial investment acceptance and discourages subsidized real estate investments in favor of unsubsidized investments. However, the required profit for acceptance of a permanently maintained investment is below the profit boundary for maintenance if maintenance is not contractually required. Consequently, the subsidy that induces the investment is least expensive if maintenance is not required, more expensive if maintenance is permanently required and most expensive if maintenance is induced immediately after initial construction but thereafter is at the discretion of the manager. All of our findings are strongest for poorer quality properties. Copyright 2004 by the American Real Estate and Urban Economics Association
Year of publication: |
2004
|
---|---|
Authors: | Blazenko, George W. ; Pavlov, Andrey D. |
Published in: |
Real Estate Economics. - American Real Estate and Urban Economics Association - AREUEA. - Vol. 32.2004, 1, p. 55-84
|
Publisher: |
American Real Estate and Urban Economics Association - AREUEA |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Investment timing for new business ventures
Blazenko, George W., (2010)
-
Investment timing for dynamic business expansion
Blazenko, George W., (2009)
-
Value maximizing hurdle rates for R&D investment
Blazenko, George W., (2010)
- More ...